FoE(HK) Green Finance Blog 香港地球之友綠色金融網誌

Green Finance Advisor of Friends of the Earth (HK)

The term “ESG” representing environmental, social, and governance criteria, has gained traction in investment circles since its introduction in the early 2000s. Despite the proliferation of “ESG funds” since 2010, defining what constitutes an ESG fund remains a challenge. This paper, authored by Chris Fidler and Nicole Gehrig, seeks to clarify the classification of ESG funds by proposing a structured framework that categorizes these funds based on observable characteristics rather than ambiguous terminology.

The Problem with ESG Funds

The ambiguity surrounding ESG funds stems from three primary interpretations:

1. Investment Composition: Some view ESG funds as those predominantly investing in assets with favorable ESG characteristics. However, this definition is problematic, as it implies a clear categorization that does not exist in practice. The lack of consensus on what qualifies as an “ESG investment” complicates this interpretation.
2. Moral Goodness: Others perceive ESG funds as those that inherently contribute positively to environmental and societal well-being. This perspective is fraught with subjectivity, as opinions on what is deemed “good” vary widely and can lead to political divisiveness.
3. Functionality: A more pragmatic view sees ESG funds as those that incorporate ESG information and issues into their investment processes without making normative judgments. This definition allows for a broader classification but still struggles with the variability within the category.

To address these issues, the authors propose focusing on the functional aspects of ESG funds, establishing a classification universe that includes all funds that consider ESG factors to varying degrees.

Classification Framework

The paper outlines a classification system based on three observable features:

1. Feature 1: A process that uses ESG information to enhance risk-adjusted returns. This feature emphasizes the integration of ESG data into investment decision-making.
2. Feature 2: Policies that manage investors’ exposure to systemic ESG issues. This aspect highlights the importance of governance and accountability in fund management.
3. Feature 3: Explicit intentions and action plans aimed at achieving specific environmental or social outcomes. This feature signifies a commitment to measurable progress in ESG objectives.

By defining these features, the authors argue that a more robust classification system can be developed, allowing for distinct groups of ESG funds. For instance, funds that only employ Feature 1 may focus solely on financial returns, while those exhibiting Feature 3 are actively working towards specific ESG goals.

Challenges in Classification

The paper emphasizes that fund classification is inherently complex. Existing frameworks, often created by asset managers or regulators, tend to lack rigor, leading to confusion and inefficiency in the marketplace. The authors identify several key challenges:

• Vagueness in Definitions: Current classifications often rely on terms that lack clear definitions, resulting in varied interpretations among stakeholders.
• Diverse Fund Characteristics: The significant heterogeneity among funds complicates efforts to categorize them meaningfully.
• Regulatory Issues: As regulators seek to establish guidelines for ESG funds, the lack of a standardized classification system poses challenges for compliance and enforcement.

Design Objectives

To create an effective ESG fund classification system, the authors propose several design objectives:

• Utility for Diverse Stakeholders: The classification system should serve the needs of investors, regulators, and researchers by providing clear distinctions among funds based on their ESG characteristics.
• Facilitate Informed Decision-Making: Investors should be able to select funds that align with their risk-return preferences and moral values.
• Promote Transparency: A well-defined classification framework can enhance transparency in the fund selection process, helping to reduce misinformation in the marketplace.

Implementation Guidelines

The authors provide guidelines for implementing the proposed classification system, emphasizing the need for clear criteria and thresholds for assigning funds to specific groups. They recommend a systematic approach that includes:

• Defining Boundaries: Establishing precise criteria that delineate different categories of ESG funds based on the defined features.
• Testing and Adjusting: Continuously evaluating the effectiveness of the classification system and making necessary adjustments based on market feedback.
• Naming Groups: Careful consideration of group names to avoid misinterpretation and ensure clarity in communication.

Conclusion and Future Directions

The paper concludes by positioning this work as a starting point for improving ESG fund classification. The authors express hope that their framework will inspire further research and collaboration among stakeholders interested in advancing the understanding and practice of ESG investing.

In summary, the complexity of ESG fund classification calls for a structured approach that prioritizes observable features over vague terminology. By establishing clear boundaries and guidelines, the proposed framework aims to enhance the transparency and efficacy of ESG investing, ultimately benefiting investors and society as a whole.

Reference

How to Build a Better ESG Fund Classification System

https://rpc.cfainstitute.org/en/research/reports/2024/how-to-build-a-better-esg-fund-classification-system

Ms Serena Mak CESGA and Mr Anthony Cheung CESGA, Board Governors of Friends of the Earth (HK)

As we stepped off the plane from Baku, Azerbaijan after attending COP29, we couldn’t help but reflect on the changing climate finance landscape. The bustling halls of Baku Stadium served as a microcosm of the global push toward sustainable finance, with a special focus this year on climate finance. These reflections formed the basis of our recent Asia-Pacific COP29 Roundtable discussion in Hong Kong, where we gathered with fellow delegates and stakeholders to explore how we can translate global climate dialogues into regional action.

Anthony: Among my few hats, I serve as a supervisory board member of the World Benchmarking Alliance (WBA), and one of my key takeaways was the strong need for standardisations and benchmarking of sustainable development goals (SDGs). Investors and financiers are seeking clear, standardised metrics to assess corporate performance in advancing sustainable development. This was evident across multiple pavilions – from Brazil to the Just Transition spaces.

Serena: What struck me was the evolution of climate finance discussions from last year’s COP in Dubai. This year, there was a much stronger focus on the nuts and bolts of energy transition – not just the high-level goals, but the practical infrastructure needed: grids, transmission, storage solutions for renewable energy. Walking through the renewable energy hub really drove home how this isn’t just about new technology – it’s about deploying and scaling existing solutions.

Anthony: Absolutely. And this is where Hong Kong’s role becomes crucial. As the only major international financial centre situated in the Global South (emerging markets and developing economies), we have a unique responsibility and opportunity. The market is calling for clear frameworks around transition finance, especially for high-emitting sectors where technology isn’t fully commercialised yet.

Serena: That reminds me of a powerful moment at one of the panels – an Indonesian representative explained how 80% of the province’s population earn their money from anything related to the coal value chain. We need to think about where the money goes and where the gap is, and how the private sector can move the needle.

Looking ahead to COP30 in Belém, Brazil, we see several priorities for Hong Kong:

• Leveraging our position as a bridge between China and international markets, particularly in establishing taxonomy equivalence between different jurisdictions
• Developing practical frameworks for transition finance
• Building capacity across sectors – from banking to education
• Showcasing concrete case studies of successful climate finance initiatives

Anthony: Another thing that we learned at COP29 is that three key existing technologies – solar, wind, and energy storage – are already in place to bring us toward net zero. With China leading in all three areas, Hong Kong is perfectly positioned to help channel global capital toward these genuine climate solutions.

Serena: True, and while the various financial targets discussed at COP29 – from $100 billion to $300 billion to $1.1 trillion – fell short of what’s needed, what really matters is how much capital actually flows into climate projects. That’s where Hong Kong’s financial expertise becomes crucial.

As we look towards COP30, we are both optimistic about Hong Kong’s role in scaling up climate finance across Asia. The path ahead isn’t simple, but with robust frameworks, strategic collaboration, and a focus on practical solutions, we can help bridge the gap between climate ambition and action.

The views expressed in this blog post are personal reflections of the authors based on their experiences at COP29.

Alexandra Tracy香港地球之友綠色金融顧問

近日，筆者到訪新加坡出席RI Asia會議，獲益良多。會議期間，再次印證了一個現象：兩地業界一向喜歡互相參照和借鑑。監管機構尤為如此。回想當年筆者在港交所上市委員會任職時，我們會時刻關注新交所的最新動向。

當前，可持續發展披露的規管領域正經歷重大變革。新的標準制定機構相繼成立、新的專業術語不斷湧現，加上新規則將影響全球數以千計的企業。此刻，正是檢視兩地在這方面的發展進程並進行相互比較的最佳時機。

統一標準的新方向：ISSB的誕生

2021年氣候峰會（COP 26）上，國際可持續發展準則理事會（ISSB）應運而生，為業界帶來了重大突破。這標誌着過往五花八門的自願披露計劃將告一段落，取而代之的是一個更完善的全球匯報框架。ISSB以現有框架為基礎，特別參考了氣候相關財務披露工作組的成果，著手制定高質量、統一化的可持續發展披露準則。

截至2023年中，ISSB推出首兩項重要準則：涵蓋一般可持續發展事項的IFRS S1，以及針對氣候議題的IFRS S2。這些準則旨在為全球可持續發展披露建立基準標準，各地決策者可根據當地情況靈活採納，或結合本地要求進行調整。

港交所率先採納ISSB準則

在ISSB準則的採納進程中，港交所可謂領先同儕。今年四月，港交所就加強ESG報告框架中的氣候相關披露發表諮詢總結，並宣佈將其改稱為「ESG報告守則」。新規定將於2025年1月起分階段實施，其中主板上市公司必須強制披露範圍1及範圍2的溫室氣體排放。同時，企業需根據「不遵守就解釋」原則披露氣候相關風險與機遇、管治、策略、風險管理，以及指標和目標。至於範圍3的溫室氣體排放，雖然同樣採用「不遵守就解釋」機制，但大型上市公司須於2026年1月起強制披露，而GEM上市公司則採取自願披露形式。

新交所擴大規管範圍 涵蓋非上市企業

新交所於今年9月就其可持續發展匯報制度發表諮詢總結，當中加入ISSB的氣候相關要求。根據新增的披露規定，自2025財年起，所有上市公司須按照ISSB的氣候相關要求提供資訊，並強制披露範圍1及範圍2的溫室氣體排放。其他「主要項目」則可根據「不遵守就解釋」原則再延後一年。至於範圍3的溫室氣體排放，新交所表示將待評估企業的準備情況及實施經驗後，才制定具體的時間表。

值得注意的是，新加坡開創亞洲先河，計劃要求大型非上市企業須同樣作出強制性氣候相關披露。此規定涵蓋連續兩個財政年度內，年收入達10億新元及總資產超過5億新元的企業。自2027財年起，相關企業須向新加坡會計與企業管理局呈交年度氣候披露報告。

Discover engaging green finance events this December 2024. Browse the calendar and register for events that align with your interests through the links below:

以上一圖看清2024年12月精彩的綠色金融活動！如欲參加及了解活動詳情，歡迎瀏覽以下網址:

2 Dec [1] FoE (HK) COP Series: Asia-Pacific COP29 Roundtable

3 Dec [2] The Green Economy: Key trends and why it matters

5 Dec [3] The 12th China SIF Annual Conference

5 Dec [4] Special briefing with IPR: Net zero transition after COP29 & US elections

10-11 Dec [5] UNEP FI Global Roundtable 2024

11 Dec [6] Unlocking capital: powering transition finance in emerging markets

17-18 Dec [7] GHG Emissions Reporting for Financial Professionals

Alexandra Tracy, Green Finance Advisor of Friends of the Earth (HK)

I was in Singapore last week for RI Asia, which was a great event.  But it clearly reminded me how so many of us in that city and in Hong Kong always like to benchmark ourselves against each other.  No one more so than the regulators: when I was on the Listing Committee at HKEx, for example, we always had half an eye on what was going on at SGX.

As the field of sustainability disclosure regulation is changing rapidly, with new standard setting bodies, new acronyms and new rules which will affect thousands of companies across the world, it’s a good moment to look at where the two cities have got to in the process and how they stack up against each other.

ISSB: One Standard to Guide the Many

At COP 26 in 2021, many people heaved a sigh of relief at the announcement of the formation of the International Sustainability Standards Board (ISSB), which would end the “alphabet soup” of voluntary disclosure initiatives and put in their place a robust global reporting framework.  Building on the work of many of the existing initiatives, especially the Task Force on Climate Related Financial Disclosures, the ISSB began developing a set of high quality, consistent standards for sustainability disclosure.

By mid-2023, the ISSB had published its first two standards: IFRS S1 for general sustainability concerns, and IFRS S2 on climate issues.  These guidelines are intended to provide a comprehensive global baseline of sustainability disclosure standards, but national policy makers can decide how to enact them or combine them with jurisdiction specific requirements. 

Hong Kong Leading on ISSB Alignment

HKEx has been one of the earliest adopters of the ISSB’s reporting principles.  In April, the exchange published consultation conclusions on enhanced requirements for climate related disclosures under its ESG reporting framework, which will be renamed the ESG Reporting Code.  The new rules will be implemented in phases from January 2025.  In addition to mandatory disclosure of scope 1 and scope 2 greenhouse gas emissions, Main Board listed companies must provide information, on a comply or explain basis, about climate related risks and opportunities, governance, strategy, risk management and metrics and targets.  Main Board listed companies must also disclose scope 3 greenhouse gas emissions on a comply or explain basis.  This requirement will become mandatory for large cap companies from January 2026.  GEM listed companies are expected to make voluntary disclosures.

Singapore to Extend Reporting Mandate to Unlisted Companies

SGX published consultation conclusions in September this year on its sustainability reporting regime, including the addition of the ISSB’s climate related requirements.  Additional disclosure requirements will be implemented in phases from full year 2025, when all listed companies must provide information according to the ISSB’s climate related requirements, including disclosure of scope 1 and scope 2 greenhouse gas emissions, on a mandatory basis.  Companies will be able to report on the other “primary components” in their sustainability reports on a comply or explain basis for a further year.  SGX will review companies’ readiness and experience with the upgraded disclosure requirements before establishing an implementation roadmap for reporting scope 3 greenhouse gas emissions.

In a first for Asia, Singapore is planning to introduce the same mandatory climate related reporting requirements for large non listed companies, defined as those with annual revenue of at least SGD1 billion and total assets of at least SGD500 million for two financial years immediately preceding the current financial year.  From full year 2027, they will have to file annual climate disclosures with the Accounting and Corporate Regulatory Authority of Singapore.